Credit Management - Electric Reliability Council of Texas€¦ · •Summarize the credit...

ERCOT MARKET EDUCATION

Credit Management

2019_06 Credit Management

This presentation provides a general overview of the Texas

Nodal Market and is not intended to be a substitute for the

ERCOT Protocols, as amended from time to time. If any

conflict exists between this presentation and the ERCOT

Protocols, the ERCOT Protocols shall control in all respects.

For more information, please visit:

http://www.ercot.com/mktrules/nprotocols/

Protocol Disclaimer

Housekeeping

• Restrooms

• Refreshments

• Attendance sheet

• Questions

Housekeeping

Please turn off cell phones

& other electronics

Course Introduction

• This course is intended for personnel responsible for

meeting ERCOT creditworthiness requirements at their

companies.

• Includes companies registered as Qualified Scheduling

Entities and CRR Account Holders

Course Audience

• Describe the impacts of common business activities on

credit exposure

• Define the types of Financial Security acceptable to ERCOT

• Illustrate how ERCOT calculates Available Credit Limits

• Summarize the credit management processes in ERCOT’s

markets

• Locate and utilize various credit reports from the Market

Information System.

Upon completion of this course, you should be able to:

Course Objectives

Course Modules

Overview1

2 Establishing and Maintaining Creditworthiness

3 Credit Exposure from Market Activities

4 Determining Available Credit Limits

5 Credit Processes

6 MIS Credit Reports

Modules in this course include:

Module 1

Overview

• The ERCOT Market Environment

• Qualified Scheduling Entities

• CRR Account Holders

• The Counter-Party

• Creditworthiness requirements

• Allocation of credit by Counter-Party

Topics in this module ...

Module Topics

The ERCOT Market Environment

Qualified Scheduling Entities

• Settle financially with ERCOT

• Must meet creditworthiness

requirements

* ERS-only QSEs are exempt from creditworthiness requirements

The ERCOT Market Environment

CRR Account Holders

• Settle financially with ERCOT

• Must meet creditworthiness

requirements

• Entity that is also a QSE and/or a CRR Account Holder

• Responsible for meeting Creditworthiness requirements

Introducing ... The Counter-Party

A Counter-Party must maintain posted Financial Security

at or above Total Potential Exposure

minus Unsecured Credit Limit

Creditworthiness Requirements

Financial

Security

Unsecured

Credit Limit

Potential

Exposure

• Estimated liabilities from various market activities

• Future Credit Exposure from Congestion Revenue Rights

(CRRs)

Total Potential Exposure (TPE)

Financial

Security

Unsecured

Credit Limit

Potential

Exposure

• Based on ERCOT Creditworthiness Standards

• Determined from Counter-Party financial statements

and credit ratings

• Updated periodically by ERCOT

Unsecured Credit Limit

Financial

Security

Unsecured

Credit Limit

Potential

Exposure

• Collateral posted by Counter-Party

• ERCOT Protocols define the acceptable forms1

Financial Security

Financial

Security

Unsecured

Credit Limit

Potential

Exposure

1 Protocol 16.11.3

Available Credit?

Financial

Security

Unsecured

Credit Limit

Potential

Exposure

Minimum

Financial Security

beyond minimum

provides available

credit for daily ERCOT

market activities

Financial

Security

Available

Credit

• Congestion Revenue Rights Markets

(CRR Auction, CRR Trades)

• Day-Ahead Market (DAM)

Available Credit Limits are used in:

Available Credit

Available Credit Limit Reports posted by ERCOT

• Calculated daily

• Twice on business days

• Once on weekends and holidays

• Posted to MIS1 Certified Area

1 Market Information System

Allocation of Credit

Counter

Account

HolderQSE

Maintains Financial

Security with ERCOT

Day-Ahead

Market

Credit Limit

Auction

Credit Limit

Available credit is shared

Module 2

Establishing and Maintaining

Creditworthiness

• Credit Application

• Financial statement requirements

• Setting a Counter-Party’s Unsecured Credit Limit

• Types of Financial Security

Module Topics

• Establish initial values for credit calculations

• Post sufficient Financial Security

New QSE or CRR Account Holder?

Establishing Creditworthiness

Where do I

start?

• Calculated by ERCOT

• Based on data from Credit Application

Establishing Initial Values

Financial

Security

Unsecured

Credit Limit

Potential

Exposure

Minimum

Submitting Credit Application

• Load

• Daily average MWhs

• Percentage to be purchased in Real-time

• Estimated number of ESI IDs

• Generation

• Daily average MWhs

• Percentage to be sold Bilaterally

Requires estimates to calculate TPE:

Potential

Exposure

• Two years of annual statements, if available

• Audited statements preferred

• Unaudited or quarterly statements may suffice

• Subsequent quarterly statements helpful

Requires Financial Statements as attachments

Used to determine the

Unsecured

Credit Limit

• Publicly held

• Privately held

• Municipally-Owned Utility and Electric Co-operatives

In General,

Setting the Unsecured Credit Limit

Total Assets

Total LiabilitiesSome percentage as

Actual methodology varies by nature of company

For companies with Tangible Net Worth > $100 Million:

Total Assets

Total Liabilities +

Intangible AssetsTangible

Net Worth

Up to 3% as Unsecured Credit Limit

if publicly rated

Up to 1.8% as Unsecured Credit Limit

if privately held and not publicly rated

may not exceed $50 Million

• Tangible Net Worth < $100 Million, or

• Not publicly rated

For Municipally-Owned Utilities and Co-operatives:

Total Secured Debt Up to 5% as Unsecured Credit Limit

Total Assets

• Guarantee Agreement

• Letter of credit

• Surety bond

• Cash deposit

Types of Financial Security

Posting Financial Security

Unsecured

Credit Limit

Financial

Security

• Provided from

another entity

• Based on their

Unsecured Credit

Guarantee Agreement

Unsecured

Credit LimitUnsecured

Credit Limit

Limited to $50 Million

• per Counter-Party

• per Guarantor

Guarantee Financial

Security

• Guarantee Agreement

• Letter of credit

• Surety bond

• Cash deposit

Types of Financial Security

Unsecured

Credit Limit

Financial

Security

Considered

“Secured Collateral”

Secured

Collateral

Secured Collateral Description Limit

Letter of Credit

• Unconditional

• Irrevocable

• Names ERCOT as

beneficiary

Subject to credit

rating of issuer

Surety Bond

• Issued by insurance

company

• Names ERCOT as

beneficiary

$10 Million per

Counter-Party

per issuer

Cash Deposit

• Deposited in account

designated by ERCOT

• May bear interest payable

to Counter-Party

Counter-Party EZrisk submits a credit

application. Based on the information provided,

ERCOT determines the following:

• Total Potential Exposure = $12 Million

• Unsecured Credit Limit = $1 Million

Scenario 1

Establishing Creditworthiness

$11 Million

No. $10 Million Limit

Financial

Security

Unsecured

Credit

Potential

Exposure

What is the minimum Financial Security the

Counter-Party must post to enter the market?

Can EZrisk provide all their Financial

Security with a single Surety Bond?

• Unsecured Credit Limit subject to change

• Total Potential Exposure changes with Market Activities

Managing creditworthiness is an ongoing process

Maintaining Creditworthiness

Financial

Security

Unsecured

Credit Limit

Potential

Exposure

Minimum

• Counter-Party’s financial condition may change

• Financial statements must be updated

Unsecured Credit Limit subject to change

Financial Statement

Income

Balance Sheet

Cash Flows

• Annual audited

• Quarterly unaudited

Total Potential Exposure changes with Market Activities

Trades

Real-Time

Potential

Exposure

Module 3

Credit Exposure from

Market Activities

• Review of Market Activities

• Details of Total Potential Exposure

• Future Credit Exposure from owning Congestion

Revenue Rights (CRRs)

• Estimated Settlement exposure from various market

activities

Module Topics

Market Activities – A Review

Market Transactions for Energy and Ancillary Services

Bilateral Trades

Day-Ahead Market

Real-Time Market

• Energy Trades

• Ancillary Service Trades

Trade Settlements

• QSEs settle with each other

• Both QSEs must report trades to ERCOT to impact

ERCOT Settlements

Arranged between QSEs

Bilateral Trades

• Buy and Sell Energy

• Sell Ancillary Services to ERCOT

DAM Settlements

• Buyers

• Pay Day-Ahead Market price

• Receive MW credit in Real-Time

• Sellers

• Are paid Day-Ahead Market price

• Incur MW obligation in Real-Time

QSEs Participate in Day-Ahead Market (DAM)

DAM Settlements

TOMORROWTODAY

• Are price takers

• Pay for energy not previously

purchased through Trade or DAM

QSEs Representing Load

• Settled for difference between

Real-Time Load and Trade or

DAM transactions

• Settle with Load Serving Entities

Loads in Real-Time

Real-Time Settlements

• Set prices

• Are paid for energy not previously

sold through Trade or DAM

QSEs Representing Resources

• Settled for difference between Real-

Time production and Trade

or DAM transactions

• Pay for infeasible Ancillary Services

• Settle with Resource Entities

Resources in Real-Time

Real-Time Settlements

• Payments due

• Charges incurred

Day-Ahead Market Settlement Statements

Settlement Timelines

OperatingDay

Day 2Day Ahead

DAM Statement

• Payments due

• Charges incurred

Real-Time Market Settlement Statements

Day 180Operating Day

Initial Statement

Final Statement

True-Up Statement

Day 55

Single Daily Settlement Invoice

InvoiceDay + 2

InvoiceDay + 3

InvoiceDay

17001700

ERCOT Issues Invoice• DAM • RTM Initial• RTM Final• RTM True-up

Payment Due to ERCOT

Payment Due to Market Participant

Congestion Costs

Resource Node

$30/MWh

Load Zone

$40/MWh

$50/MWh

$25/MWh

Price separation across

the grid exposes buyers

and sellers of energy to

Congestion Costs

• Financial instruments for hedging congestion

costs in Day-Ahead Market

• Pay owner sink-minus-source price difference

Congestion Revenue Rights (CRRs)

Hedging Congestion Costs

Source

$40/MWh

$50/MWh

$25/MWh

Hedging Congestion Costs

Point-to-Point Congestion

Revenue Rights

Two Types of CRRs:

• Point-to-Point Options can only

result in a payment

• Point-to-Point Obligations can

result in a payment or charge

• CRR Auction

• Allocation (Special Cases)

• Bilateral Trades

Three ways of acquiring CRRs:

Acquiring Congestion Revenue Rights

Auction

Allocation

• Monthly Auction

• Long-Term Auction Sequence

• Six successive auctions

• Six-month windows

• One window each month

Auctions take place twice per month:

Congestion Revenue Right Auctions

*Exact dates on CRR Activity Calendar - http://www.ercot.com/mktinfo/crr

Jan-June

July-Dec

Jan-June

July-Dec

Jan-June

July-Dec

Jan-June

July-Dec

Jan-June

July-Dec

Jan-June

• Source/Sink Settlement Point pair

• Month or strip of consecutive months

• Time-of-Use Blocks

CRRs are auctioned by:

Congestion Revenue Right Attributes

Mon Tues Wed Thurs Fri Sat Sun

Off-Peak (0100 – 0600)

Peak Weekday (0700 – 2200)Peak Weekend

(0700-2200)

Off-Peak (2300 – 2400)

CRR Auction Settlement Invoice

Day 4 Day 5Day 1Auction Completed

ERCOT Issues Auction Invoice

ERCOT PostsAuction Results

17001700

Payment Due to ERCOT

Payment Due to CRR Account

Holder

Total Potential Exposure

Two Flavors of Total Potential Exposure

Trades

Real-Time

Potential

Exposure

Total Potential Exposure Any

May be satisfied by any

form of Financial Security

or Unsecured Credit

Total Potential Exposure Secured

Must be satisfied by

Secured Collateral

Trades

Real-Time

Potential

Exposure

Secured

(TPES)

May also include an Independent

Amount for capitalization

TPES includes the

Future Credit Exposure

of Congestion Revenue

Rights owned by a CRR

Account Holder

• Based on historical valuation

• Different methodology for options and obligations

Future Credit Exposure for CRRs

FCE = FCEOPT + FCEOBL

Projected over current month

and all future months

Projected over current month

and next month

• Based on historical average prices

• Each path has its own value

Value = NAOPTMW * A

Future Credit Exposure for PTP Options (FCEOPT)

NAOPTMW = Net Awarded PTP Options for

source-to-sink path

A = Path-Specific DAM-Based Adder (price)

• Calculated for each source/sink pair

• Three year look-back

Path-Specific Adder

ci99 = 99th percentile

Confidence Interval

FCEOPT = − NAOPTMW ∗ Max(0, Aci99)

Summed over

• All source/sink pairs

• Remaining TOU hours of current month

• TOU hours of next month (Prompt Month)

Counter-Party EZrisk owns PTP Options

on two paths.

• Path P1: • 40 MW Peak Week-day• Aci99 = $0.05/MWh

• Path P2: • 10 MW Peak Week-day• Aci99 = $0.10/MWh

There are 80 Peak WD hours left in the

current month and 320 Peak WD hours

next month.

What is EZrisk’s FCEOPT?

Example 1

Calculating Future Credit Exposure for PTP Options

Example 1

Calculating Future Credit Exposure for PTP Options

Working Space

FCEOPT = − [(40MW * $0.05/MWh * 400h)

+(10MW * $0.10/MWh * 400h)]

= − [$800 + $400]

= − $1200

Bonus Question:

What does a negative exposure mean?

• Volume-weighted average price

• Based on historical CRR path values

– OR –

Portfolio Weighted Auction Clearing Price (PWACP)

• Volume-weighted average price

• From most recent Auction

Portfolio Weighted Adder (PWA)

Future Credit Exposure for PTP Obligations (FCEOBL)

. . . whichever results in highest risk

• Monthly average price

• Three-year look-back

Portfolio Weighted Adder (PWA)

ci100 = 100th percentile

Confidence Interval

Where NAOBLMW = Net Awarded PTP Obligations for Portfolio

FCEOBL = NAOBLMW ∗ (−Min(0, PWAci100, PWACP))

Summed over

• All hours of current month

• All hours of next month (Prompt Month)

• All hours of Forward Months

Counter-Party EZrisk owns PTP Obligations for

the current and upcoming months. All their PTP

Obligations have had slightly positive values in

DAM for the past three years.

In the most recent monthly auction, several PTP

Obligation paths cleared at slightly negative

prices.

• PWA = $0.0938

• PWACP = ($0.1012)

Scenario 2

Does EZrisk have a Future Credit Exposure

from these PTP Obligations?

Yes! PWACP wins out.

Putting it all together,

Future Credit Exposure

Credit for PTP Options offsets the

exposure of PTP Obligations

TPES = Max [0, FCE]

Trades

Real-Time

Potential

Exposure

Secured

(TPES)

May also include an Independent

Amount for capitalization

TPES = Max [0, FCE] + IA

• $10 Million total assets, or

• $1 Million in

• Unencumbered assets for Munis and Co-ops

• Tangible net worth for all others

Participation in everything but CRR

• $5 Million total assets, or

• $500,000 in

• Unencumbered assets for Munis and Co-ops

• Tangible net worth for all others

Participation in all markets

Capitalization Criteria

• $500,000 for participation in all markets

• $200,000 for participation in everything but CRR

If Counter-Party does not meet capitalization criteria,

Independent Amount shall be

Independent Amount

ERCOT may also include

an Independent Amount

because of a material

change in Counter-Party’s

financial condition

Counter-Party EZrisk owns both PTP

Obligation and Options.

At close of business today:

• FCEOPT = − $1200

• FCEOBL = $2600

EZrisk meets the capitalization criteria for

participation in all markets.

What is EZrisk’s TPES?

Example 2

Calculating Total Potential Exposure Secured

Example 2

Calculating Total Potential Exposure Secured

Working Space

= -$1200 + $2600

= $1400

TPES = Max [0, FCE] + IA

= Max [0, $1400] + $0

= $1400

Trades

Real-Time

TPEA is based on the

settlement impact from

various market activities

Potential

Exposure

(TPEA)

Potential

Exposure

(TPEA)

Potential

Exposure

(TPEA)

Potential

Uplift+=

Potential

Exposure

(TPEA)

Potential

Uplift+=

Estimated Aggregate Liability (EAL) is

based on historical market behaviors

Potential

Exposure

(TPEA)

Potential

Uplift+=

Minimum Current Exposure (MCE)

creates a floor for credit exposure

Potential

Exposure

(TPEA)

Potential

Uplift+=

Potential Uplift (PUL) captures risk of

market uplifts from short payments

Potential

Exposure

(TPEA)

Potential

Uplift+=

Two categories of QSE Estimated Aggregate Liability

Estimated Aggregate Liability for QSEs

Estimated

Aggregate

Liability

Estimated

Aggregate

Liability

(EALq)

Estimated

Aggregate

Liability

(EALt)

Counter-Parties

with Load and/or

Gen QSEs

Counter-Parties

with no Load and

no Gen QSEs

(Trade-Only)

• Calculated for all QSEs represented by Counter-Party

• Addresses multiple types of risk

Estimated Aggregate Liability for QSEs (EALq)

Current Risk (Billed & Unbilled)

Future Risk (Real-Time & Day-Ahead)

POLR Mass-Transition Risk

Estimated

Aggregate

Liability

(EALq)

A Couple of Multipliers

Factors Purpose Value

M1 Projecting

Future Risk

M1 = M1a + M1b

M1a = Termination Time upon default

= 12 Days

M1b = Mass Transition time for QSEs

with Load

= 3 to 8 Days

M2 Estimating

Current Risk

M2 = Maximum Operating Days complete,

but unbilled

= 9 Days

Future Risk

• Operating Days yet to come

• Historical behaviors

• Historical and forward prices

MT Risk

Current

MT Risk

Current

Future

RiskQSE

Estimated

Aggregate

Liability

(EALq)

Initial Estimated Liability (New CPs)-or-

RFAF * Max Real-Time Liability Extrapolated-or-

Real-Time Liability Forward

DFAF *

Day-Ahead

Liability

Extrapolated

• Based on estimates from Credit Application

• Daily Estimated Load (MWhs)

• Percentage to be purchased in Real-time

• Daily Estimated Generation (MWhs)

• Percentage to be sold bilaterally

Initial Estimated Liability (IEL)

Future Risk

Used during first 40 days of

activity in ERCOT

Future Risk

QSE Type Initial Estimated Liability (IEL)

Load IEL = DEL * Max [0.2, RTEFL] * RTAEP * (M1 + M2)

Resource IEL = DEG * Max [0.2, RTEFG] * RTAEP * (M1 + M2)

Load &

Resource

IEL = DEL * Max [0.1, RTEFL] * RTAEP * (M1 + M2)

+ DEG* Max [0.1, RTEFG] * RTAEP * (M1 + M2)

DEL Daily Estimated Load

RTEFL Real-Time Energy Factor for Load

DEG Daily Estimated Generation

RTEFG Real-Time Energy Factor for Generation

RTAEP Real-Time Average Energy Price (HB_HUBAVG)

Volume Price No. of Days

QSE Type Initial Estimated Liability (IEL)

Load IEL = DEL * Max [0.2, RTEFL] * RTAEP * (M1 + M2)

Resource IEL = DEG * Max [0.2, RTEFG] * RTAEP * (M1 + M2)

Load &

Resource

IEL = DEL * Max [0.1, RTEFL] * RTAEP * (M1 + M2)

+ DEG* Max [0.1, RTEFG] * RTAEP * (M1 + M2)

Counter-Party EZrisk just entered the

market.

• From their Credit Application:

• Daily Estimated Load = 12,000MWh

• Percentage Purchased in Real-Time = 50%

• Daily Estimated Generation = 12,000MWh

• Percentage sold Bilaterally = 50%

• Other information:

• M1 = 16

• M2 = 9

• RTAEP = $40/MWh

What is EZrisk’s Initial Estimated Liability?

Example 3

Calculating Initial Estimated Liability (IEL)

Example 3

Calculating Initial Estimated Liability (IEL)

DEL * Max[0.1, RTEFL] * RTAEP * (M1+M2)

+ DEG * Max[0.1, RTEFG] * RTAEP * (M1+M2)

= 12,000MWh* Max[0.1, 0.5] * $40/MWh * 25

+ 12,000MWh* Max[0.1, 0.5] * $40/MWh * 25

= 12,000MWh * 0.5 * $1000/MWh

+ 12,000MWh * 0.5 * $1000/MWh

= $12,000,000

Working Space

• Based on actual Real-Time Settlements

• Average Initial Settlement

• 14 calendar day lookback

• Projected over M1 days

• Maximum risk over the

previous 40 days

Max Real-Time Liability Extrapolated (Max RTLE)

Future Risk

Real-Time Forward Adjustment Factor (RFAF)

Historical Prices Forward Prices0

Real-Time Pricing at North Hub

14 Days 21 Days

RFAF =Forward Average Price

= 1.36Historic Average Price

Real-Time Forward Adjustment Factor (RFAF)

Real-Time Pricing at North Hub

RFAF =Forward Average Price

14 Days 21 Days

• Based on estimated Real-Time Settlements

• Net amount for most recent 7 Operating Days

‒ Actual for some days

‒ Estimates1 for others

• Adjusted by 150%

Real-Time Liability Forward (RTLF)

Future Risk

Captures recent trends

that diverge from

historical results

1 See Protocol Section 16.11.4.3.2 for details IE

Future Risk

• Based on actual Day-Ahead Market Settlements

• Average Day-Ahead Market Settlement

Day-Ahead Liability Extrapolated (DALE)

Future Risk

DAM Forward Adjustment Factor (DFAF)

DAM Pricing at North Hub

DFAF =Forward Average Price

7 Days 21 Days

DAM Forward Adjustment Factor (DFAF)

DAM Pricing at North Hub

DFAF =Forward Average Price

7 Days 21 Days

Counter-Party EZrisk has been in the

market for five months.

• Initial Estimated Liability = $12 Million

• Real-Time Liability Extrapolated peaked at $3

Million twenty days ago

• Real-Time Liability Forward = $1 Million

• Day-Ahead Liability Extrapolated = ($500,000)

• Real-Time Forward Adjustment Factor = 1.05

• Day-Ahead Forward Adjustment Factor = 1.10

What is EZrisk’s future risk in the EAL

calculation?

Example 4

Calculating Future Risk Portion of EAL for QSEs

Example 4

Calculating Future Risk Portion of EAL for QSEs

Working Space

= Max [ (1.05 * $3M) or $1M ] + (1.1 * -$500,000)

= Max [ $3.15M or $1M ] ̶ $550,000

= $2.6 Million

IEL (First 40 days only)-or-

RFAF * Max RTLE-or-

DFAF * DALE+Max

RFAF * Max RTLE-or-

RTLF+ DFAF * DALE

Current Risk

• Estimates risk of completed

Operating Days where

settlement is not complete

• Unbilled

• Billed but unpaid

• Based on historical behaviors

Max Unbilled Real-Time Amount-or-

Real-Time Liability Completed

and Not Settled

Outstanding

Unpaid

Transactions+Max

MT RiskMT Risk

Future

Current

Estimated

Aggregate

Liability

(EALq)

previous 40 days

Max Unbilled Real-Time Amount (Max URTA)

Current Risk

• Based on estimated Real-Time Settlements

• Sum of net amounts for all Operating Days

Completed but not Settled

Real-Time Liability Completed and Not Settled (RTLCNS)

Current Risk

Captures recent trends

that diverge from

historical results

Outstanding Unpaid Transactions (OUT)

Current Risk

OIA Outstanding Invoice Amounts

UDAA Unbilled Day-Ahead Amounts

UFA Unbilled Final Amounts

UTA Unbilled True-up Amounts

CARD CRR Auction Revenue Distribution

OUTq = OIAq + UDAAq + UFAq + UTAq + CARD

Current Risk

Component Description

OIA Includes outstanding invoices of all types

UDAA Estimates1 for all Day-Ahead Markets that have not settled

UFA • Average RTM Final Settlement

• 21-day lookback

• Projected over 55 days

UTA • Average RTM True-up Settlement

• 21-day lookback

• Projected over 180 days

CARD Estimate of Counter-Party’s share of CRR Auction

Revenues already collected, but not paid out

1 See Protocol Section 16.11.4.3.1 for details

• Unbilled Real-Time Amount peaked at

$1.7 Million twenty days ago

• Real-Time Liability Completed and Not Settled =

$1.5 Million

• Outstanding Unpaid Transactions

• Outstanding Invoice Amounts = $130,000

• Unbilled Day-Ahead Amounts = ($29,000)

• Unbilled Final Amounts = ($1000)

• CRR Auction Revenue Distribution = ($200,000)

What is EZrisk’s current risk in the EAL

calculation?

Example 5

Calculating Current Risk Portion of EAL for QSEs

Example 5

Calculating Current Risk Portion of EAL for QSEs

= Max [ $1.7M or $1.5M] + $130,000

- $29,000 - $1,000 - $200,000

= $1.6 Million

Max URTA-or-

RTLCNSOUT+Max

Working Space

POLR Mass Transition Risk

• Captures Incremental Load

Exposure for Provider of Last

Resort (POLR) in the event of

a Mass Transition

• Based on

• Number of ESI IDs

transitioned

• Pro-rata share of defaulting

Counter-Party’s RTLE

Future

RiskFuture

Current

RiskCurrent

MT Risk

Estimated

Aggregate

Liability

(EALq)

This adjustment remains in

place only until the Mass

Transition is complete

Two categories of QSE Estimated Aggregate Liability

Estimated Aggregate Liability for QSEs

Estimated

Aggregate

Liability

(EALq)

Estimated

Aggregate

Liability

(EALt)

Counter-Parties

with Load and/or

Gen QSEs

Counter-Parties

with no Load

and/or Gen QSEs

(Trade-Only)

• Calculated for all QSEs represented by Counter-Party

• Addresses multiple types of risk

Estimated Aggregate Liability for Trade-Only QSEs (EALt)

Current Risk (Billed & Unbilled)

Future Risk (Real-Time & Day-Ahead)

POLR Mass-Transition Risk

Estimated

Aggregate

Liability

(EALt)

Future Risk for Trade-Only QSEs

• Operating Days yet to come

• Historical behaviors

• Historical and forward pricesCurrent

Current

Future

RiskQSE

Estimated

Aggregate

Liability

(EALt)

Initial Estimated Liability (New CPs)-or-

RFAF * Max Real-Time Liability Extrapolated-or-

Real-Time Liability Forward

DFAF *

Day-Ahead

Liability

Extrapolated

previous 40 days

Max Real-Time Liability Extrapolated (Max RTLE)

Future Risk for Trade-Only QSEs

Future Risk

20 days

previous 40 days

Max Unbilled Real-Time Amount (Max URTA)

Current Risk for Trade-Only QSEs

Current Risk

20 days

Potential

Exposure

(TPEA)

Potential

Uplift+=

• Calculated for all CRR Account Holders represented by

Counter-Party

• Only one type of risk

Estimated Aggregate Liability for CRR AHs (EALa)

CRR AH

Estimated

Aggregate

Liability

(EALa)

Current Risk Outstanding

Unpaid

Transactions

Current Risk

OUTa = OIAa + UDAAa

Component Description

OIA Outstanding Invoice Amounts

UDAA Unbilled Day-Ahead Amounts – Estimates1 for all Day-

Ahead Markets that have not settled

1 See Protocol Section 16.11.4.3.1 for details

Potential

Exposure

(TPEA)

Potential

Uplift+=

Minimum Current Exposure

Max Wins!

Initial Minimum Current Exposure

Day-Ahead to Real-Time Risk

Generation Outage Risk

Minimum Load Exposure

Load vs. Generation vs. Trade Position

Minimum

Current

Exposure

2 days of exposure

1 day of exposure

5 days of exposure for Load QSE

2 days, otherwise

$40,500 for Trade-Only QSE

$0, otherwise

14 day lookback for Historic Data.

Generation discounted by 20%.

Potential

Exposure

(TPEA)

+= Potential

Uplift

ERCOT may have to uplift short paid amounts owed by

other Counter-Parties

Potential Uplift

Potential

Uplift

Potential Uplift includes proportional

amounts based on Counter-Party

activities

• Amount to be uplifted within one year

• 25% of amount on a payment plan due to

be repaid beyond one year

Putting TPEA back together

TPEA = Max[0, MCE, Max[0, ((1-TOA)EALq + (TOA)EALt + EALa)]] + PUL

Trade-Only Activity flag

• QSE Estimated Aggregate Liability

= $4.2 Million

• CRR AH Estimated Aggregate Liability

= ($10,000)

• Minimum Current Exposure = $940,000

• ERCOT has no outstanding short paid

amounts

What is EZrisk’s TPEA?

Example 6

Calculating Total Potential Exposure Any

Example 6

Calculating Total Potential Exposure Any

= $4,190,000

$940,000-or-

Max [0, ($4.2M - $10,000)]

MCE-or-

Max [0, (EALq + EALa)]

PUL+MaxWorking Space

Module 4

Determining Available Credit Limits

• Calculating Available Credit Limits

• For CRR Auction

• For Day-Ahead Market

• How credit is shared between CRR Account Holders and

Module Topics

Allocation of Credit

Counter

Account

HolderQSE

Maintains Financial

Security with ERCOT

Day-Ahead

Market

Credit Limit

Auction

Credit Limit

Available credit is shared

Available Credit

TPEA + 10%

TPES + 10%

Potential

Exposure

Potential

Exposure

MarkupUnsecured

Credit Limit

Secured

Collateral

Guarantees

Financial

Security

Available

Credit

Financial Security

beyond minimum

provides available

credit for daily ERCOT

market activities

Available Credit

TPEA + 10%

Unsecured

Credit Limit

Available

CreditSecured

Collateral

Guarantees

TPES + 10%

Available credit is

shared by CRR Account

Holders and QSEs

Available Credit Limit for the CRR Auction (ACLC)

TPES + 10%

TPEA + 10%

– UCL

– Guar.

Available

Credit

(ACLC)Secured

Collateral

CRR Auction Credit Limit:

CRR Trade

Exposure

Approved but

not complete

ACLC or

Requested limitMin

Available Credit Limit for the DAM (ACLD)

Unsecured

Credit Limit

Guarantees

Secured

Collateral

Remainder

Collateral

Remainder Collateral:

Secured Collateral not consumed

by CRR-related activities

Secured Collateral, minus

• TPES

• CRR Trade Exposure

• Available credit locked for CRR

Auction

Available Credit Limit for the DAM (ACLD)

TPEA + 10%

Unsecured

Credit Limit

Available

Credit

(ACLD)Remainder

Collateral

Guarantees

DAM Credit Limit

10% of TPES

Counter-Party EZrisk has one CRR

Account Holder and one QSE. Their

credit stats so far:

• Unsecured Credit Limit = $1 Million

• Total Potential Exposure Secured = $1400

• Total Potential Exposure Any = $4.19 Million

• Posted Secured Collateral = $5 Million

• No CRR Trades outstanding

• No Guarantees

EZ risk locks $900,000 for the CRR Auction that

is about to start.

What is EZrisk’s ACLD for the next Day-Ahead

Market?

Example 7

Calculating Available Credit Limit for Day-Ahead Market

Example 7

Calculating Available Credit Limit for Day-Ahead Market

Working Space

ACLD = (Remainder Collateral)

+ UCL – TPEA * 1.10 – TPES * 0.10

= (Secured Collateral – TPES – Locked)

+ UCL – TPEA * 1.10 – TPES * 0.10

= ($5M - $1400 - $900,000)

+ $1M - $4.19M * 1.10 - $1400 * 0.10

= $489,460

Module 5

Credit Processes

• Initial Credit posting for new Counter-Parties

• Requests for additional collateral

• Daily Credit cycle

• Payment Breaches and remedies

Module Topics

Initial Credit Posting

Potential

Exposure

(TPE)Unsecured

Credit Limit

Financial

Security

Available

Credit

Minimum

Prior to market entry,

Counter-Party must

post sufficient Financial

Security to meet 100%

of TPE

• Expertise in Markets

• Market Operational Capabilities

• Allowable Participant

• Capitalization

• Risk Management Capabilities

Counter-Party must also certify compliance with the

following CFTC requirements:

Initial Credit Posting

Must recertify annually

90% TPE Notifications

Unsecured

Credit Limit

Remainder

Collateral

Potential

Exposure

(TPEA)Guarantees

ERCOT will use

reasonable efforts to

advise Counter-Party

90% TPE Notifications

Secured

Collateral

Potential

Exposure

Secured

(TPES)

ERCOT will use

reasonable efforts to

advise Counter-Party

Collateral Requests

Unsecured

Credit Limit

Remainder

Collateral Total

Potential

Exposure

(TPEA)Guarantees

ERCOT shall notify

Counter-Party of

additional Financial

Security due

Collateral Requests

ERCOT shall notify

Counter-Party of

additional Secured

Collateral due

Secured

Collateral Total

Potential

Exposure

Secured

(TPES)

• Provide suitable Financial Security

• Post at least the required amount

• ERCOT must receive by COB on the second

Bank Business Day after notification

Counter-Party requirements after Collateral Request

Posting Additional Financial Security

Guarantor

Secured

Collateral

The Daily Grind

Daily Credit Cycle Timeline

0800 1030 1200 1500 1630 1730 1800 2000

Overnight Calculation

1. TPE & ACL calcs

2. Generate Reports

3. Identify Collateral

4. 90% TPE

Notifications

Counter

Parties Credit Staff CMM

Prior to 0800

1 Credit Monitoring and Management

Counter

0800 1030 1200 1500 1630 1730 1800 2000

1. Receive Preliminary

Reports

2. Receive Collateral

Requests

3. Receive 90% TPE

notification

1. Review Preliminary

TPE & ACL Calcs

2. Post Preliminary

Reports

3. Send Collateral

Requests as needed

4. Send 90% TPE

Notifications

Counter

1. Receive Preliminary

Reports

2. Receive Collateral

Requests

3. Receive 90% TPE

notification

1. Review Preliminary

TPE & ACL Calcs

2. Post Preliminary

Reports

3. Send Collateral

Requests as needed

4. Send 90% TPE

Notifications

1. Receive and Review

CRR Trades

2. Receive Invoices,

Statements &

Payments

0800 1030 1200 1500 1630 1730 1800 2000

Counter

1. Review and

Approve CRR

Trades

2. Post Collateral

Payments

3. Perform Exposure

Adjustments as

needed

1. Receive DAM

Estimates

0800 1030 1200 1500 1630 1730 1800 2000

Counter

1. Review Final TPE &

ACL Calcs

2. Send CRR Trade

Response

Intra-Day Calculation

1. TPE & ACL Calcs

2. Generate Reports

16301500

0800 1030 1200 1500 1630 1730 1800 2000

1. Send ACLC to CRR

2. Receive “Locked”

credit from CRR

1. Send ACLC to CRR

2. Receive “Locked”

credit from CRR

1. Lock Auction Credit

Limit in CRR System

Counter

0800 1030 1200 1500 1630 1730 1800 2000

Counter

1. Send ACLD to DAM

2. Receive

Confirmation from

1. Send ACLD to DAM

2. Receive

Confirmation from

0800 1030 1200 1500 1630 1730 1800 2000

Counter

1. Review and post

Final Reports

1. Receive Invoices,

Statements &

Payments

2. Receive RTM

Estimates

3. Receive CRR

Inventory

1. Receive Final

Reports

Payment Breaches and Remedies

• Settlement Invoice

• Collateral Request

• Other ERCOT Invoices

Failure to pay an obligation when due is a Payment Breach

Payment Breach

ERCOT shall immediately

attempt to contact the

Market Participant

telephonically and by email

Becomes a Late Payment if cured within one Business

Day of Notification

Payment Breach

ERCOT shall track the

number of Late Payments in

each rolling 12-month Period

Becomes a Default if not cured within one Business Day

of Notification

Payment Breach

• Hold any payments due

• Draw on Financial Security

• Forfeit awarded CRRs

• Repossess CRRs

• Revoke Market Participant’s

rights

• Terminate Market Participant’s

Standard Form Agreement

ERCOT may take several actions to remedy Defaults

Remedies for Defaults

Remedies for Late Payments

Circumstance Options Enforcement

First Late Payment*• No action

• Level I Enforcement

Level I

Financial Security

at or above

110% * (TPE – UCL)

Second Late Payment*

• Level I Enforcement,

if not there already

• Level II Enforcement

Level II

Cash or Letter of Credit

at or above

110% * (TPE – UCL)

Third Late Payment*

• Level II Enforcement,

if not there already

• Level III Enforcement

Level III

Last chance warning

Fourth Late Payment* Termination

* In any rolling 12-month period

Module 6

MIS Credit Reports

• Keeping track of it all

• Available Credit Reports on MIS

• Details of Credit Reports

Module Topics

Keeping Track of it All

Credit Reports

ACL Summary Reports

Calculation

Components

Prepay

Summary

Posting frequency• Twice per

Business Day• Once per non-

Business Day

• NPRR 702 provides rules

• Implementation date TBD

Flexible Accounts

Prepay Summary

For current Prepay account

practices, please contact your

ERCOT Account Manager or

the ERCOT Credit Manager

MCE Summary Reports

Exposure

Generation

Outage Risk

Day-Ahead to

Real-Time Risk

Posting frequency• Once per Day• Twice per

Business Dayif changes

DAM Credit Reports

Aggregate

Credit

Exposure

Posted after each DAM

Remaining

Available

Credit Limit

Posted every 15min before DAM

Keeping Track of it All

Credit Reports

TPE Summary Reports

Calculation

Components

Posting frequency• Twice per

Business Day• Once per non-

Business Day

Future Credit Exposure Summary Reports

FCEOPT Report

Volumes

Exposure

FCEOBL Report

Volumes

Exposure

Other parts

Posted once per day

Estimated Aggregate Liability Reports

Summary

QSE major

major parts

Detail Report

Posting frequency• Once per Day• Twice per

Business Dayif changes

Finding Credit Reports on MIS

Conclusion:

A Few Thought-Provoking Exercises

A Counter-Party named Loads-R-us is

registered as a QSE. They have Load but

no Generation.

What are some ways they can reduce their

credit exposure in the ERCOT Market?

Discussion

Let’s Talk About It

Real-Time

Trades

Potential

Exposure

(TPEA)

A Counter-Party named Gen-R-ocity is

registered as a QSE. They have Generation

but no Load.

Will they ever have any credit exposure?

Discussion

Real-Time

Trades

Potential

Exposure

(TPEA)

A Counter-Party named Derivatives-R-us is

registered as a CRR Account Holder.

What are some ways they can reduce their

credit exposure in the ERCOT Market?

Discussion

Real-Time

Trades

Potential

Exposure

Secured

(TPES)

Independent

Amount

• Describe the impacts of common business activities on

credit exposure

• Define the types of Financial Security utilized at ERCOT

• Illustrate how ERCOT calculates Available Credit Limits

• Summarize the credit management processes in ERCOT’s

markets

• Locate and utilize various credit reports from the Market

Information System.

You should now be able to …

Course Summary

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completing this instructor-led course.

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